Good morning, and welcome to MGP Ingredients, Inc., First Quarter 2019 Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Mike Houston, Investor Relations. Please go ahead.

Thank you, Debbie. Good morning, everyone, and thank you for joining the MGP Ingredients conference call and webcast to discuss the company's financial results for the first quarter 2019. I'm Mike Houston with Lambert & Company MGP's Investor Relations firm. And joining me today are members of their management team, including Gus Griffin, President and Chief Executive Officer; and Brandon Gall, Vice President of Finance and Chief Financial Officer. We will begin the call today with management's prepared remarks and then open the call up to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements, such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to a number of factors, including the risk factors described in the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the press release issued by MGP today, you can access it at the company's Web site, www.mgpingredients.com. At this time, I would like to turn the call over to MGP's President and Chief Executive Officer, Gus Griffin. Gus?

Thank you, Mike, and thank you all for joining us. On this call, we will provide an overview of our results for the quarter, updates on key financial performance metrics and a discussion of progress against our strategy. Then we will take your questions. Before we turn to the results this quarter, I'd like to welcome Brandon Gall to the call this morning as our recently appointed Vice President of Finance and Chief Financial Officer. Brandon has played a critical role in supporting MGP's growth over the past seven years and we are very excited to welcome him to our executive leadership team. Since our last call, our previous CFO, Tom Pigott, resigned from his post to pursue another opportunity at a publicly traded CPG company in Ohio. We are very grateful to Tom for his leadership and dedicated service the past three and a half years. Thanks to his work strengthening the finance team, we have an accomplished internal successor in place. We truly appreciate all that he accomplished here at MGP and we wish him the very best with all his future endeavors. Now we will turn to the results for the first quarter. While both our business segments showed top-line growth over the prior year, driving consolidated sales for the quarter up a little over 1%, our results were lighter than we would have liked. Our results for this quarter reflect both headwinds to our business and customer order timing. However, we do not believe they are the result of any changes in underlying consumer trends or our position in the market. As a result and after a detailed review of our outlook for the remainder of the year, we are confidently confirming our previous annual guidance. Looking at each segment individually. In our Distillery Products segment,…

Thanks, Gus. For the quarter, consolidated sales increased 1.3% to $89.1 million, reflecting growth in both the Distillery Products and Ingredient Solutions segments. Consolidated gross profit decreased to $16.7 million as a result of a decrease in gross profit in both segments. Consolidated gross margin decreased by 280 basis points to 18.7% of sales, down from 21.5% in the prior year quarter. Corporate selling, general and administrative expenses for the quarter were $8.1 million, down a little over $400,000 due to lower professional fees and partially offset by an increase in personnel costs. Operating income decreased to $8.5 million, compared to $10.4 million during the prior year quarter, reflecting a decline in gross profit in both the Ingredient Solutions and Distillery Products segments. Our corporate effective tax benefit was 17.7% in the current quarter compared to a tax rate of 12.3% in the prior year quarter. The primary driver for the year-over-year change was a tax benefit resulting from vested share based awards. This unusual situation was contemplated in our annual guidance. Net income for the first quarter increased 8.9% to $9.7 million and earnings per share increased $0.05 to $0.57 per share as a result of the previously mentioned tax benefit. MGP's balance sheet remains strong, allowing us to continue investing in our growth and returning funds to shareholders. First quarter operating cash flow represented a use of cash totaling $3.8 million, compared to $900,000 provided by operations in the prior year quarter. This result includes a $4.9 million increase in receivables versus the prior year quarter due to increased sales, timing of sales and customer mix and a $2.7 million increase in refundable income taxes versus the prior year quarter resulting from the tax impact of vested share based awards. During the period, we also invested a net…

Thanks, Brandon. Now, I'd like to touch on some additional initiatives that support our long-term strategic plan. The American whiskey category continues to experience strong growth and we are investing to support that growth. Our warehouse expansion plan continued during the quarter allowing us to increase our storage capacity. Our investment spent-to-date now totals approximately $45 million of the $51.8 million authorized by the Board. As Brandon mentioned, we also invested an additional $3.1 million in our aging whiskey inventory. This brings our inventory of aging whiskey to $79.5 million at cost. While we will be stowing aged whiskey from this extensive library of inventory, we plan to grow the value of this inventory at cost through 2019. We remain confident in both the demand and pricing for our aged whiskey and our plan for deploying this inventory and maximizing its economic value over the long-term. We also continued to strengthen our capabilities in other key areas, certifying three new Master Distillers and two new Master Blenders across our organization earlier this month. The art and science of fermentation, distillation and blending are the foundation of our distilled spirits business due to the size and complexity of our distillery operations, we need a very deep and broad pool of talent to operate successfully. At MGP, the master designation is awarded after a robust certification process. This process includes education, experience, specialized training and concludes with oral examinations by other masters and the completion of a dissertation. Our development of master-level experts provides additional assurance of our ability to consistently deliver unique and high quality whiskeys, vodkas and gins. We are extremely proud of our new masters. Earning this distinction is a testament to their dedication to their craft. While our focus in the Distillery Products segment will always be supplying…

[Operator instructions] The first question comes from Bill Chappell with SunTrust. Please go ahead.

Good morning.

Good morning, Bill.

Gus, let's start with a little more color on brown spirits, as much as you're willing to give. Just trying to first understand, within the quarter, was there meaningfully more aged sales versus prior quarters of lightly aged or fully aged because if there were, it just implies a pretty meaningful drop in the unaged sales. I'm just trying to understand what the mix of the business was in the quarter on brown.

Yes. So just to refresh everybody's memory, we said in the fourth quarter that going forward in terms of providing further disclosure and transparency, we'll break out the premium beverage alcohol between brown and white on an ongoing basis on a quantitative manner, which we did, and then that we would break out brown on a qualitative manner. So we'll give you some color on that. So the total brown was down 12% in aged, so the two components of the brown goods are aged and new distillate. And both aged and new distillate sales were down very similar amounts. So then, we also said in the script that -- so the new distillate was down due to order timing with one class of customers. We mentioned the national and multinational brand owners as a customer class, so that was -- the order timing there. Those orders have come in and been filled in the start of the second quarter, so we feel very good that we're back on track there. In terms of aged, our sales were down. As we said, they were down very similar to the rate for new distillate. And that is a result of the transition from selling -- the volume was down, so we're selling -- we sold less overall barrels, but we sold more older barrels. And that highlights the transition from selling lightly aged whiskey, which we have done in the past, to us now selling older whiskey, which is what we'll be doing going forward.

And I think I understand a bit of it. Does that also tie into -- I know a big tranche of what was put away four years ago occurred in the second quarter. So does that in part say we're holding back on selling that until it gets to full aged and there's more to come kind of in 2Q and beyond that?

Yes. First of all, we are very confident in the plan we have to sell that. And as we've mentioned in the past, we don't give a number of how much we're going to sell. That is our lever to make sure we deliver our annual guidance. And we're comfortable that both the volume demand and pricing is there for us to be able to use that lever to deliver on it. But we also don't give quarterly guidance and we don't want to bid against ourselves, so we don't want any of our aged customers or any of our new distillate customers to try to use the quarter to get a discount. So we're very comfortable that this aged whiskey will fill out over the year. We talked about the ramp-up accelerating and we're very comfortable and confident that it will ramp up over the year as we planned. But, I'm not going to -- we're not going to provide quarterly guidance on how that will shake out.

Well, I guess where are you in the process -- and I know part of this was figuring out how to place it, be it with multinationals, with small players, with others. Where are we in the process there of kind of structuring it out for the year?

Very good. You're right. We said we were going to sell it to multinational and national brand owners, craft players and export. The multinational and national that class and the craft players, that is going very well. We've made sales to them. We will continue to make sales to them. The export is a longer-term sales process. We just added that sales resource in the fourth quarter. And that resource is out there very aggressively developing new relationships with new customers overseas. So that will start coming to fruition later on in the year and then going forward in the future years. But the sales that have been transacted and that we plan to be transacted among those first two classes, again the multinational, national and the craft distillers, we're very pleased with it. And since we're looking at the long-term, looking at the full year as opposed to a quarterly number, we're confident they're going to fill out like we want.

And is there any change to your outlook that you can get 3x the price for a fully aged four-year?

Not at all. Both on what we have seen for the pricing for a product that's less than four years old, we've been getting above the 3x when you extrapolate it out. And for the product that we've sold, the four-year-old product we have sold, we've been getting better than that. So, we are very confident that the 3x pricing will hold.

And then one last one on brown spirits. You had said that you expected your total inventory to go higher this year. Is that on an absolute basis because as you draw down, you expect that the $79 million number to go higher from here? That's what I'm trying to understand.

Yes. That is correct. Let me just clarify that. So that's at cost. So in essence, we expect to put more barrels in at cost than we draw out at cost. And we want to make it very clear that we plan to build that through '19. We haven't given any guidance or any indication past that. As we've talked in the past, we believe at some point we'll hit equilibrium, where we're pulling out the same number of barrels we're putting in. But all those numbers are at a cost. And we added $3.1 million this quarter at cost. And we think we will -- we believe and plan to continue to add to that while at the same time we're drawing out inventory to make those aged sales.

Got it. And then switching to white goods, it was a little surprising that -- I mean, you've got pricing, that there was growth just based on your prior comments. So is this first quarter kind of what the market looks like going forward and it's more of kind of a hit to margins that you're not able to offset that with the pricing or do you expect it to get worse in terms of competition?

On the white goods, I would really focus on the gross margin because when corn goes up, which is exactly what happened, the price of corn goes up, the selling price of white goods and industrial went up a little bit. It didn't go up enough to offset the increase in the corn prices. So again, industrial is very much a commodity-based product. White goods is a little less so. And then as I said, gin a little bit better than that. So, as your input cost go up, you will see your sales number -- your pricing go up, but in this market, that increase in pricing is not enough to offset the increase of the input cost, so the margins go down. So I wouldn't want anybody to get excited about a rebound in pricing on white goods because if corn prices go down, that correlation is going to pull it down.

Got it. And then on the wheat protein, same kind of question. Is down high single digits that it was in the first quarter kind of a good metric to use or is there seasonality to that business, where the orders came in last year bigger in certain quarters where you get tougher comps?

We're really focused on our specialty wheat proteins and specialty wheat starches. And so we take the wheat proteins first. That's primarily our TruTex product, and again as I said, we're cycling against that loss of the large customer we lost. That large customer was in there all of last year. And so of course, this first quarter is the first time we're cycling against that lost business. And then on the starches, on the specialty wheat starches, we've done a really good job of building our Fibersym business, but it was really a barrier to us growing it too much because of the uncertainty around the regulatory status from the FDA. Now that, that's been removed, we think we can resume to really building that business, and that's also where specialty proteins and specialty starches is really where we're better able to absorb increases in flour pricing. And of course, we were sort of handicapped by both by the reasons I mentioned. And so that's why the increase in flour cost came through more than it has in the past. But we think with those barriers removed and our continued efforts to build the TruTex through other customers that we will be -- and optimize our customer and product mix going forward, we'll be able to mitigate the flour increase more than we have in the first quarter.

Okay. And then last one, Brandon, welcome aboard. You picked an interesting start to your tenure, but a question on the balance sheet. Accounts receivable had a pretty big jump year-over-year and actually even sequentially. Can you kind of walk me through that?

Yes. So our accounts receivable were up stated even in the script. And really, the big drive here were a few things, but they were up primarily due to, first of all, increased sales for the quarter. Secondly, customer mix and timing of those sales also drove that number higher.

So meaning it was towards the end of the quarter, it was meaningfully higher than year-over-year than the sales number. So I'm just trying to understand what might have been baked in there?

Yes. And that covers it. And there's really nothing outside our normal course of business. Just again, just the type of sales and type of customers that came in when they did in the quarter, Bill.

So you would expect it to reverse partially as you move to second quarter?

Well, we're not going to give quarterly guidance. But we think as the normal business plays out that, that will be something that will normalize over time.

Okay. I will turn it over. Thanks.

Thanks, Bill.

Thanks, Bill.

The next question comes from Alex Fuhrman with Craig-Hallum. Please go ahead.

Great. Thank you for taking my question. Wanted to ask about the new customers that you brought in for brown goods in the first quarter, if I heard correctly on the prepared remarks, it sounds like you brought in more new customers this year than you did in the same period last year. So, just wondering why we didn't see those new customers move the needle so much in the results in the first quarter. And just wondering if you could comment, did you lose any customers in the first quarter? And if you could just comment on perhaps the size of the new customers that you brought in and what you would expect based on other customers of that kind of typical profile that you brought in over the years, how long you would expect those customers to be ramping up their business with you?

Sure. So in the fourth quarter call, we highlighted the success of our efforts to recruit new customers for our premium beverage alcohol offerings. Each of the last two full years, we have added incrementally more new customers, and then again this quarter, we added more incremental new customers this quarter than we did last Q1. Now that can be small start-ups, or it can be established customers that we've won the business from other people. For instance, we highlighted that we did add two new established gin brands. Now again, our white goods is already large, so I don't want anybody to think that adding two gin customers is going to completely turnaround the trend that you're seeing in the white goods, but the margins are better and they're better insulated than they are on GNS. So, it can be all types of customers. Now of course, the small ones, some of them are gradually building their business and then are hampered by things like getting started, access to funds and so forth. But then, you do have brands that break out. So it's sort of a mixed bag. We know that the craft segment is going to be -- is key to our long-term growth, so we're working very hard to acquire those customers. And again, some of them will do -- some of them will grow nicely. Some of them will grow very nicely on their own. Some will be acquired. And consolidation is -- we always view consolidation as a positive because we work very closely with the national and multinational brand owners who are usually the consolidators. They have lots of synergies they can bring to it, sales force, capital, ability to buy inventory and so forth. And that can really bump those along. So we're working through acquiring a wide type of new customers and how they come through and how they affect our business depends on how fast they grow and if they get acquired and so forth. But, the key thing is to go out there and make sure that we are continuing to attract new customers, so we get the long-term benefit.

Okay. Thanks, Gus. That's really helpful. And then, if I could ask about the brands that you have in your portfolio. It looks like you launched a new bourbon brand in the quarter. Just curious, I know they're still small relative to your overall revenue and inventory. But just if you can give us a sense of how pleased you are with the progress, would you say the reception from distributors and consumers has been what you would have expected, given the strong critical reviews coming of your own products?

Yes. We put a dedicated effort into getting those reviews and it's always rewarding when you get -- I mean the San Francisco Spirits Competition is a very prestigious event. And when you get those type of accolades, that's very good. And how that really works is that drives consumer interest. So writers report that. The competition itself puts out those results. People are interested in the category. Consumers who are interested in the category take that as validation of the uniqueness in the quality of our products. So, that drives that awareness and they go out and try it. At the same time, you have to make sure that your distributor partners in the various markets are getting the distribution, so the consumer can find it. So that's when we talk about focusing on increasing our distribution. And then those two things work where eventually you will see the acceleration and the velocity per point of distribution. So this year, in the first quarter, we stepped into Texas. Texas is a top five market. And it really is the continuation of our plans. So you saw us go into small markets and bigger markets. And last year, we went into Chicago, again another top five market, so we're feeling very good about the way this is going, but it's a long-term effort. We expect these brands to develop if we nurture them correctly and we continue our narrow and deep approach to building them, that they will be ready to contribute longer term when we need them, but we are very pleased. The attention from the distributors, the attention and interest from retailers and consumers all say that we're doing the right thing. But again, it's a long-term effort to build them the right way so that they contribute when we need them over the longer term.

That's great. Thank you very much.

Thanks, Alex.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Gus Griffin for any closing remarks.

Thank you for your interest in our company and for joining us today for our first quarter call. We are certainly pleased with the continued progress we made towards implementing our long-term strategic plan and remain confident that it will provide us the resources we need to deliver strong growth in 2019 and beyond. I look forward to talking with you again after the second quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.